Putting an end to the confusion over the applicability of service tax on residential projects, Gautam Bhattacharya, commissioner,service tax, Central Board of Excise and Customs, has clarified that service tax is not applicable to residential projects as long as the builder or developer does not engage contractors for carrying out work.

The commissioner's statement could well bring relief to many small and medium projects in Tamil Nadu. Earlier, service tax was levied on all residential projects with more than 12 dwelling units, primarily owing to the wrong interpretation of rules. It worked out to be 12.36 per cent of the cost of labour or roughly 4.12 per cent of the total cost of construction, excluding the land value. This was a huge burden on home buyers. For instance, an apartment priced at Rs 4,000 per sq ft, entailed a service tax burden of Rs 160 per sq ft (going by what a builder in Chennai charges). Hence, for a 1,500 sq ft apartment, the buyer paid Rs 2.4 lakh as service tax.

In a circular issued on January 29, Bhattacharya clarified that the sale of an apartment by a builder' or promoter' or developer' to a buyer did not fall under the ambit of service tax, irrespective of the project size.

While this helps clarify the issue to a large extent across the country, Tamil Nadu's case is peculiar - here, the undivided share of land is registered even before the construction is begun, and there is no registration of the apartment as such when the work is completed. Since the buyer entrusts the construction of the apartment to the promoter through a contract, the service tax officials, hitherto, treated it as a service (not sale) and, hence, taxable. Challenging this, the Tamil Nadu chapter of Confederation of Real Estate Developers' Association of India, (CREDAI) had approached service tax commissionerate.

Through the latest order, the commissioner has said that even in cases where "the ultimate owner enters into a contract for construction of a residential complex with a promoter or builder or developer, who himself provides service of design, planning and construction, and thereafter the ultimate owner uses it for his personal use," service tax is not applicable. "However, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax."

This proviso would help all builders who carry out construction of projects on their own, without engaging outside contractors. But there aren't too many in Chennai who fall under the developer-cum-contractor bracket. Most builders outsource construction work to external agencies.

"Even in cases where the builders themselves do construction, they do not keep the labour on their pay rolls. Supply of labour is outsourced to labour contractors and hence they have to pay tax," noted P Suresh, MD, Arun Excello.

However, if the builder engaged more number of contractors and if the individual contractor's annual turnover did not cross Rs 10 lakh, service tax would not be applicable, Bhattacharya told TOI.

But handling too many contractors would be a difficult task for big projects. "Our payments to contractors run into several crores of rupees. It is not possible to handle scores of contractors. Instead, paying tax is a better option," noted Suresh.